Under Hong Kong law, a person who knows or suspects that any property represents the proceeds of crime is required to report to the Joint Financial Intelligence Unit (JFIU).2 This requirement applies to all persons, including banks and other financial institutions.3 Following a submission of an STR, the bank can decide whether or not to freeze an account, to comply with its obligations under anti-money laundering laws and to avoid criminal liability.
In a previous alert, we summarised and reviewed the decision of Hong Kong’s highest court in Tam Sze Leung (CFA) upholding, the “No Consent Regime”, which allows the authorities to refuse to give consent to a bank to deal with funds in an account (albeit it is the bank that makes the decision to freeze the account).4 In this article, we dive further into what may constitute “suspicion” giving rise to an STR and what an account holder can do if its account is frozen.
What amounts to “suspicion”?
The “suspicion” threshold for an STR is lower than the “knowledge or reasonable cause to believe” threshold for money laundering. It is a relatively low threshold and contains an element of subjectivity; that is, while the suspicion must be genuinely held, it need not be reasonably held. The leading case is R v. Da Silva5 where the court said that “suspicion” means that “there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice.”
The Hong Kong Monetary Authority (HKMA) and Securities and Futures Commission (SFC), the banking and securities authorities in Hong Kong, have provided guidelines on how to comply with such statutory disclosure obligations. According to both the HKMA and the SFC:
“…when a transaction or series of transactions of a customer is not consistent with the [institution]’s knowledge of the customer, or is unusual (e.g. in a pattern that has no apparent economic or lawful purpose), the [institution] should take appropriate steps to further examine the transactions and identify if there is any suspicion…Once knowledge or suspicion has been formed, (a) [the institution] should file an STR even where no transaction has been conducted by or through the [institution]; and (b) the STR should be made as soon as reasonably practical after the suspicion was first identified.”6 (Emphasis added in bold)
Contractual rights and statutory protection for making disclosures to the JFIU
The standard terms of banks and other financial institutions in Hong Kong will often, if not always, contain express provisions which protect them from liability and will permit disclose information to the authorities and providing them with some degree of discretion to refuse to comply with a customer’s instructions.
In addition, there is statutory protection from civil liability when an STR is made, as highlighted in Tam Sze Leung (CFA):
“The Ordinance evidently envisages that the bank’s disclosures to the police may include information available to the bank, relevant to their investigation. Thus, the reporting duty under section 25A(1) is to disclose knowledge or suspicion “together with any matter on which that knowledge or suspicion is based” and OSCO section 25A(3) protects the bank from civil liability arising out of making such disclosures:
...
(3) A disclosure referred to in subsection (1)—
(a) shall not be treated as a breach of any restriction upon the disclosure of information imposed by contract or by any enactment, rule of conduct or other provision;
(b) shall not render the person who made it liable in damages for any loss arising out of—
(i) the disclosure;
(ii) any act done or omitted to be done in relation to the property concerned in consequence of the disclosure.”7 (Emphasis added in bold)
What should you do if your bank account is suspended or terminated?
As the highest court in Hong Kong pointed out in Tam Sze Leung (CFA), the authorities’ letter of no consent does not legally freeze any funds in any bank accounts:
“…motivated by the wish to meet its anti-money laundering obligations and to avoid criminal, regulatory and reputational sanctions, it is the bank which disables and freezes its customer’s account when it decides that the suspicion is not dispelled. The bank is not the agent of the police in this connection.”8 (Emphasis added in bold)
Accordingly, if your account is suspended, you should proactively engage with your bank to ascertain the reason for the suspension. If such an explanation is not provided, and it may not be, as your bank is not permitted to disclose the filing of an STR to you (it is an offence to “tip off”),9 you should review your account activities to assess if there is any suspicious activity that could have triggered an STR. You also should also seek legal advice as to possible next steps. Last but not least, it is advisable to continue to hold discussions, and negotiate, with your bank to release funds for necessary payments such as employee salaries and operating expenses.
Ultimately, “the bank is obliged to and does exercise its own judgment”,10 so any steps that you can take to allay their concerns will be useful. As recognised both by the HKMA and the court:
“…there may well be cases where the bank is quite satisfied in the light of its customer due diligence records and after making inquiries of its customer, that the police suspicions are unfounded. It may then proceed lawfully to operate the customer’s account (which is not frozen) notwithstanding information received from the police.”11
The adverse impact of an account suspension or termination on your business and reputation can be significant. Besides operational disruption and being unable to pay employees and creditors on time (even though this may be temporary), you may find that it is difficult to build confidence with counterparties and other banks after a suspension or termination.
Therefore, you should understand the basic concepts of AML laws in Hong Kong and take steps to strengthen your internal controls and procedures, and educate your key managers, to avoid disrupting your operations or tainting your reputation.
We have extensive experience in AML matters, including OSCO, the Anti-Laundering and Counter-Terrorist Financing Ordinance, the new regime for Dealers of Precious Metals and Stones, and other related financial crime laws. Please feel free to contact us to discuss any AML issues.
- See JFIU’s website (last accessed on 23 July 2024).
- Specifically, section 25A(1) of the Organized and Serious Crimes Ordinance (Cap. 455) (OSCO) and of the Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405) (DTRPO), and section 12(1) of the United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575) (UNATMO).
- See Hong Kong Monetary Authority, Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Authorized Institutions), May 2023 (HKMA’s AML/CFT Guidelines), at Chapter 7; and Securities and Futures Commission, Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations and SFC-licensed Virtual Asset Service Providers), June 2023 (SFC’s AML/CFT Guidelines), at Chapter 7.
- Tam Sze Leung and Others v. Commissioner of Police [2024] HKCFA 8 (Tam Sze Leung (CFA)).
- R v. Da Silva [2006] EWCA Crim 1654 at [16].
- HKMA’s AML/CFT Guidelines and SFC’s AML/CFT Guidelines, paragraphs 7.3 and 7.5.
- Tam Sze Leung (CFA) at [26]; see also section 15A(3) of DTRPO and section 12(3) of UNATMO.
- Tam Sze Leung (CFA) at [67]; see also [81].
- A person who knows or suspects an STR has been submitted and who discloses to any other person any matter likely to prejudice any investigation regarding the STR commits the offence of “tipping off” under section 25A(5) of OSCO and DTRPO, and sections 12(5) and 14(6) of UNATMO.
- Tam Sze Leung (CFA) at [68].
- Tam Sze Leung (CFA) at [68].
Client Alert 2024-160
